Learn the basics, dive in, then persevere and develop patience, says Mark Dampier of Hargreaves Lansdown.
An awful lot of column inches are devoted to the subject of disruption in finance every year. When will the big banks finally get their comeuppance? When will the traditional wealth-management industry be margin-eroded into oblivion by a “robo-adviser”? When will active fund management chuck in the high-fee towel in the face of passive-management price competition?
But there is one area of the market that was well and truly disrupted at the turn of the century – stockbroking. And the big disrupter there? The company we all now think of as being the big beast of online investment – Hargreaves Lansdown.
It was the first (as far as I know) to go “full discount” on unit trusts – taking away the old 5% up-front fee completely. It launched an online share-dealing service in 1999, which allowed us to trade in and out of anything we liked for a mere £9.95. It launched the first annuities supermarket. It set up a system that allowed clients to share in the renewal commissions paid on funds. It made self-invested personal pensions (Sipps) simple. And it did it all with probably the best – and most intuitive – web offering in the business.
Today, it isn’t the cheapest in the market (which is why its profit margins are as stunning as they are) and everyone – from investors to money managers – can find something in its offering to gripe about. I can too. But I am still a huge admirer of the way it disrupted the market and of the way it operates in it now.
So when its head of research, Mark Dampier, wrote a book (Effective Investing) outlining everything he has learnt in the 17 years he has been with the firm, I figured it was worth getting him to tell us all about it. Dampier and I don’t always agree on everything (you need only look at our exchanges on Twitter), but when it comes to the nitty-gritty of the UK fund-management industry, he knows considerably more than most.
What everyone needs to know
We dive right in. What’s the most important thing everyone needs to know about investing? Simple question. Simple answer. It is all about perseverance and patience, says Dampier. You need to learn the basics – by reading his book and MoneyWeek (obviously). You need to understand investing and how you want it to work for you. You need some idea of stockmarket history, of valuations, and of the past performance of the things you are looking at. “Technology’s been wonderful, but it’s created so much confusion in the market that people just turn off.”
There are now some 3,000 funds in the UK. “At least 90% of them are useless in the first place”, but it’s hard to tell which belong to the 90%. That turns a lot of people off at the very first stages, but everyone needs to push on. “Everything in the UK is pushing you towards doing your own thing… if you don’t, you’re going to be poorer for it.”
Can’t we all just use financial advisers, I ask? Only for a “sense check”, says Dampier – not so much for the investments themselves, but for the structures you put them in. Most advisers these days are really financial planners rather than investment managers (they tend to contract that bit out to the unreconstructed wealth-management industry anyway). But they are useful when it comes advice on when to claim your state pension and the like.
Once you’ve got the basics sorted, says Dampier, the next bit is all about patience. The average holding period for a fund is now four years, “which is ridiculous”. You have to think of investing in terms of “ten years plus”. And you have to stay in the market through good and bad times. Look at 2008 and its “diet of ghastly comment… how many people sold out of investments? Even regular savings plans? At a time when you should have just stuck tight.” Technology has made this more of a problem than it was. People can check their portfolios every day. The more they check, the more they “make decisions” – trading when they should be aiming for “masterly inactivity” instead. Note that Warren Buffett wasn’t selling in 2008.
There is a problem. Older people have money and can take all this advice. But most young people haven’t any spare cash for all this saving and investing. That’s what they all say, says Dampier. “But I reckon most people can save something if they really want to.” Most institutions have saving plans you can start from as little as £25 a month, and while people say they can’t afford even that, “actually once it goes out of your account, you forget about it. And it’s amazing how much that totals over the years. So just start. For god’s sake, just do something. Don’t just sit there, do something.”
The best funds for younger people
OK. So let’s say I am a young person who has just set up a saving scheme. What do I buy? UK smaller-company funds and emerging-markets funds, says Dampier. They are more volatile than safer alternatives, “but I think you’ll make better gains over the years”. Which small-cap funds look good right now? Dampier suggests Standard Life’s UK Smaller Companies or the Marlborough UK Micro Cap Growth funds. Who are his favourite fund managers out there today? Of the younger generation, he immediately goes for George Godber (who runs Miton UK Value Opportunities – a small-to-mid-cap UK growth fund).
Of the older generation, he is super-keen on Neil Woodford and his Patient Capital Trust (LSE: WPCT) – a good one, says Dampier, for those with a long investment timeframe. Woodford isn’t far off retirement age, but Dampier reckons he’ll be running money for another decade at least: “I think his ambition is to take his company from start-up to FTSE.” Another reliable manager is Nigel Thomas of Axa Framlington – the type of fund manager who works for the “intellectual challenge” not the money. “He’s 60 years old now but he’s no plans to retire. And I go fishing with him all the time.”
Clearly, Dampier is a great fan of active fund management. I ask him if he sees a role for passive funds in all this. Where “you can’t find a decent active manager”, he does. It is, for example, “really hard to find good active managers in America… Where is the Neil Woodford in America? Where’s the Nigel Thomas? A tracker might be a better route there”, particularly given the costs. On the passive side, where there is no way to pretend you can differentiate between the funds, they have “plummeted”. I wonder when real price competition will start in the active sector – particularly given that all too many of them are effectively trackers too (they track the benchmark so closely they have something of a nerve calling themselves “actively” managed).
Dampier reckons that the Woodfords and Thomases of the world are always going to be worth paying for. But he also thinks fund charges are coming down (partly due to passive competition and partly thanks to the likes of Hargreaves Lansdown putting pressure on firms to cut their fees). He also reckons they will end up at around 0.30%. It’s just a “grinding” rather than a sudden process: no one wants to go from making regular super-profits all the time to making normal profits. So it is taking rather longer than lots of us had hoped.
This gives me an opening to explain
my pet theory on fund fees: that “pensions freedom” – recent regulatory changes that have shook up the pensions industry – will be the thing that changes the business. It used to be that on retirement everyone had a final-salary pension or an annuity. Their incomes were set. So the price charged for investment was irrelevant to them. That’s not going to be the case any more. Instead, millions of computer literate, well-off and time-rich people are going to be trying to eke an income out of lump sums. If that income is 4%, and the cost of generating it via a fund manager is 1.5%, they will be livid.
Indeed, 1.5% might sound like a small number, but it doesn’t take much to see that it is more than a third of the yield. And they won’t have it. They will turn and say to the fund managers “your share is too high – bring it down”. Dampier is not convinced that people are that price sensitive when it comes to investing – funds, he says “aren’t like washing machines”. I think they soon will be – and that if the industry doesn’t recognise that, there will be a nasty surprise coming.
Is there a single perfect fund?
We move on. At MoneyWeek we dream of there being a single perfect fund. One that is actively managed as a one-stop shop for investors of all ages – that invests in all asset classes and somehow manages to protect capital while providing some growth and some income. An active fund run by a clever asset allocator, who’s going to do everything for us for 20 years. Is it out there? Dampier has to think about this. But his final answer is one we rather approve of. It is RIT Capital Partners (LSE: RCP), one of MoneyWeek’s favourite investment trusts – and a core part of our investment trust portfolio.
Who is Mark Dampier?
Mark Dampier, 59, is head of research at broker Hargreaves Lansdown. After doing a “stultifyingly dull” degree course in law, he graduated with a BA Honours, then spent a “double gap year” on the ski slopes. Having decided that a career in law wasn’t for him, an interest in investment led him to join financial firm Whitechurch Securities in 1983. He rose to the position of investment director, acting as the public face of Whitechurch – even being described by then-competitor Peter Hargreaves (co-founder of HL) in his memoirs as “a constant thorn in my side”. Eventually Dampier ended up joining HL in 1998.
Since then Dampier has continued to appear regularly in both print and on TV and radio, including a regular column in The Independent. His first book, Effective Investing: A Simple Way to Build Wealth by Investing in Funds, is out now, published by Harriman House, priced £19.99. In his spare time, Dampier enjoys shooting, skiing, sailing and fishing.